Last week’s news that British supermarket giant, Tesco, is to launch a US venture is likely to be one of the most significant transatlantic ventures announced this year. Accounting for an estimated one pound in every eight spent in all of Britain’s retailers, there’s no doubting the achievements that the firm has made in its home market. Yet attempts to crack America have long eluded its competitors. Why does Tesco think it should be any different?
Swelledhead’s view is that answer lies in the firm’s route to UK market leadership. The British supermarket industry is one of the most sophisticated in the world, both in terms of its product mix and supply chain. Once very much an also-ran of the grocery sector, Tesco’s success has been created out of its ability to understand the differing wants and needs of UK consumers, to develop the product lines, services and local retail environments that satisfy these.
Other British supermarkets are also effective at understanding their customers, but with more than a 30% share of the UK supermarket sector it is clear that, on the whole, Tesco is simply better at adapting and reinventing itself than competitors:
- In 1985 it was the first to emphasise health and nutrition of its own-brand products
- Its at-store petrol/gasoline business became the biggest among independent suppliers in 1991
- A lower priced value range was launched in 1993, later followed by a premium ‘Finest’ range
- The pioneering ‘Clubcard’ loyalty scheme was launched in 1995
- Its non-food business accounts for 50% of new retail space in the UK, with sales growing at double the speed of food. In 2005 a trial non-food store was opened.
Act global, think local
This aptitude for transformation is the key to Tesco’s success in entering markets outside of the UK. Here are a couple of examples, taken from the firm’s own international factsheet:
“In Tokyo, customers like to shop for small amounts of extremely fresh food, every day. Existing hypermarket formats don't meet the needs of local customers, so Tesco's entry into the Japanese market was through the acquisition of a discount supermarket operator.”
“In Thailand, customers are used to shopping at traditional wet markets, interacting with vendors and rummaging through piles of produce to choose want they want. Rather than adopting the Western approach of neatly packaged, convenient portions, our Rama IV store in Bangkok tries to meet local customers' expectations.”
This second illustration is striking when compared with the experience of that other well-known supermarket behemoth, Wal-Mart. The American firm’s strategy for all markets is to keep prices as low as possible, and it’s proven to be a very successful one. Yet the method failed with the Thai market. The reason was that local consumers preferred the street-market-style stores to which they were accustomed, even if Wal-Mart was a little cheaper. Tesco’s appreciation of the subtleties of local preferences has meant that its business in Thailand has flourished. Today it is its largest market outside of the UK in terms of number of stores and sales area.
Can Tesco adapt to the preferences of US consumers? As with any other market, if it can understand the wants and needs of local consumers – and provide for them better than competitors – there is no ostensible reason why it shouldn’t.
At the moment the company is keeping quiet about the format of its planned US stores. All that is currently known is that the firm will start on the West Coast with a convenience store concept, believed to be something akin to Tesco Express in the UK. Speaking to the BBC, the head of Tesco’s international business, Philip Clarke, said: "We will open some stores and we won't say much about them until we do. Then the customers will walk in and decide.” As the firm’s business expands east from the Pacific, it’s likely that the format will be adapted along the way. In years to come, a Tesco in Connecticut will probably be noticeably different to one in California.
The British bruiser
So, could Tesco beat Uncle Sam Wal-Mart in his own backyard? Discussing the likelihood of Tesco’s success with others, Swelledhead heard several comments that, all else being equal, the size of Tesco’s business in the US will be limited by a local preference for buying American. It’s a good point; US consumers are well known for their patriotism. Yet the evidence is that national partisanship presents little obstacle when the foreign contender has a better offer. Just consider the advancements Toyota has famously made on General Motors and Ford in recent years. Moreover, the manufacturer has been able to counter feelings of national disloyalty by sourcing and producing its vehicles within the US and there is every reason to suppose that Tesco would do the same if it believed that was what its customers wanted.
The size of the US market and the level of competition means that it would take some doing, but on the strength of the Tesco’s success in other foreign markets I wouldn’t bet against it.
